Accounting for Revenue and Capital Expenditures

Subsequent expenditures made on property, plant, and equipment can be in the form of either capital or revenue expenditures. As we noted, the distinction between the two is often hazy and depends on the accounting policies developed by management. However, the distinction is important because it affects the determination of current and future periods’ income.

Accounting for Revenue Expenditures

Revenue expenditures are expenditures whose benefits are used up or consumed in the current period. In terms of plant and equipment, revenue expenditures usually are called repairs and maintenance. Technically, a repair or maintenance is an expenditure that maintains the asset’s expected level of service or output and neither extends its useful life nor increases the quantity or quality of its output. These expenditures are expensed in the current period by debiting the expense account Repairs and Maintenance or a similar account.


Accounting for Capital Expenditures Subsequent to Purchase

Capital expenditures are those that benefit several accounting periods. In terms of plant and equipment, capital expenditures made in periods subsequent to an asset’s purchase are considered additions, betterments, or extraordinary repairs. Additions are enlargements, such as the addition of a new wing to an existing plant. Betterments are improvements to existing assets, such as the installation of a computer-controlled, temperature-monitoring system in a department store.

Also Check:  Capital and revenue profits

Extraordinary repairs are a major reconditioning or overhaul of existing assets, such as a major overhaul or the installation of a new engine. Regardless of how these expenditures are described, they either extend the asset’s useful life or increase the quantity or quality of its output.

Accounting for these expenditures is often accomplished by debiting the asset’s Accumulated Depreciation account or, in the case of an addition, debiting the asset account itself. In either case, Cash or an appropriate liability account is credited. The asset’s book value increased by the amount of capital expenditure, and subsequent depreciation expense is revised.

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